Six Things Your Startup Needs To Know About Crowdfunding
On Aug. 27, we are welcoming Slava Rubin, the CEO of Indiegogo, one of the most-successful and most-recognized crowdfunding platforms, to the Kauffman Foundation. We expect a full crowd for this event, but we also will be showing his presentation entitled “How to Raise $1Million in 30 Days or Less” on a live stream that can be found here.
I work with startups every day, and the ability to raise investment capital from the crowd is, without a doubt, one of the most exciting developments in new firm formation since perhaps the adoption of the Internet. It also is the most misunderstood concept by entrepreneurs. With all of this talk about crowdfunding and its emerging importance for funding startup companies, I thought it might be useful to list a few of the things startups need to know before they decide to embark on a crowdfunding campaign.
1) It’s about to be legal – Though Congress gave crowdfunding its blessing when it passed the JOBS Act in March of 2011, raising funds in exchange for equity will not be possible until the Securities and Exchange Commission writes the rules that will govern it. All eyes are on the SEC and, though these regulations were supposed to be released by the first of the year, they have been significantly delayed. One glimpse of hope is that the SEC did release some final rules for certain parts of the JOBS act in July, but the rules governing the more contentious issues have not been released yet. For more specifics on this point, I highly recommend the WeFunder FAQ section.
2) It’s going to universally change the ways that new companies can raise money. In theory, crowdfunding should make financial capital easier to raise because your startup can present your business to a much larger group than you could otherwise access. However, it also may mean that if your startup decides to take investment from the crowd, you may not really know who your investors are. Your investors will be a series of screen names and online profiles. Many times the connections, contacts and advice that venture capitalists and angel investors can bring to a company are more important than the capital itself. This should be a decision that every startup will have to consider when deciding how to raise capital.
3) It’s going to dramatically change the way that investors invest. Just like startups will have to decide if raising money from the crowd makes sense for their startup, investors will have to decide as well. Crowdfunding is one of those things that could completely destroy the traditional models of the way early-stage investing is done today. Many investors want to get to know the founders of their portfolio companies and want to know their businesses inside and out. Some only want to invest in companies that they can drive to. Investors will have to decide if they want to experiment with this new way of putting their capital to work or if they want to stick to their traditional way of doing business.
4) Industry-specific crowdfunding platforms will emerge. Though there will be some consolidation over time, I anticipate that many crowdfunding platforms will initially have a very specific focus. Some will cluster around a particular industry sector like technology, bioscience and consumer products. Some will focus on non-profits, and some will allow only for-profit enterprises. Others might focus on specific types and amounts that companies can raise on their platforms. Deciding which platform(s) will work best for each startup will be key to successfully raising the capital needed to accomplish the goals of each company.
5) Curated content will become increasingly important. Currently, there are tens of thousands of projects on existing crowdfunding sites from which potential investors can choose. Several sites, including this one on Kickstarter, pull together the best and most-promising campaigns in the minds of specific curators. The curators of this content – universities, non-profits and corporations – are going to become increasingly important to highlight particular startups/talent/ideas that the crowd should fund. There will simply be too many projects to choose from, and getting your startup “noticed” by one or more curators will greatly increase your chances for success.
6) It’s not about the crowd, it’s about your network. Don’t think of the “crowd” as being everyone in the entire world, everywhere. Think of the “crowd” as the potential funders that you already know. Yes, your startup might receive an investment from some foreign investor that lives thousands of miles away, but I suspect that it is tremendously more likely that you can successfully raise money from people who are already in your network. Remember that guy you used to work with a decade ago? You are already friends on Facebook, and since his rich uncle died a few months ago and left him his inheritance, he now wants to invest in your startup.
I hear all the time from startups that they just can’t find enough capital to fund their company. While the notion of crowdfunding will certainly hold great potential to close this funding gap, it will most certainly not be a panacea. Make sure that your startup considers the costs and potential benefits of raising money from the crowd. Make sure you seek the advice of other companies that have used the crowd to raise money in the past. And, if you ultimately decide to seek funding from the crowd, be sure to choose the right platform and strategy that will be the best fit for your startup in the long run.
And, don’t just take it from some random blog author – tune in to the presentation, and see what you can learn from one of the true founding fathers of the crowdfunding movement, Slava Rubin.